India’s central bank has implemented measures to reduce the rapid growth in consumer credit, which will have an impact on consumer spending and several startups in the South Asian market, according to industry executives.
The Reserve Bank of India increased risk weights on unsecured personal loans, credit card, and consumer durable loans provided by banks and non-banking financial companies (NBFCs) by 25% to 125%. The new measures exclude mortgages, vehicle and education loans, as well as gold-backed debt, as stated by the RBI.
A similar measure has been announced for banks, raising risk weights for credit card receivables for banks and NBFCs to 150% and 125% from 125% and 100%, respectively.
This decision comes after data indicated that the growth rate of unsecured loans is nearly double that of total credit expansion. Industry analysts at Goldman Sachs stated that these measures indicate the RBI’s increasing concern with the growth of these loans.
The restrictions imposed by lending partners will affect numerous startups, most of which rely on NBFCs to provide loans to consumers. A fintech founder, speaking anonymously, mentioned that the move would reduce growth “to some extent” and increase the cost of capital for startups borrowing money.
According to Jefferies analysts, “For Paytm’s lending partners, higher funding costs and increased capital requirements will affect product profitability in BNPL/PL. They may respond by tightening credit standards and/or moderating growth from elevated levels at present.”
Analysts noted that these measures indicate the RBI’s concern with the rapid growth in unsecured loans and the increasing reliance of NBFCs on bank funding.
Goldman Sachs analysts stated, “We believe the implementation of these measures will, at least theoretically, reduce the structural ROEs in consumer lending, particularly for NBFCs on higher cost of funds from the banking system as well as tighter competitive intensity, as we had earlier highlighted that higher competition would mean lower unit economics, slower growth and / or asset quality challenges.”
Several lenders, including Bajaj Finance, IDFC First, and SBI, which have traditionally had the largest share of unsecured personal loans, are expected to be among the most affected.
Goldman Sachs analysts added, “Over the last few years, bank funding to NBFCs in India’s finance sector has been on the rise, and it now constitutes >50% of NBFC’s borrowings. On the other hand, the proportion of borrowings from mutual funds/insurance companies has been on the decline. Per prior RBI commentary, this has prompted their action that, in turn, would make borrowing from banks more expensive for NBFCs. Moreover, we believe this would likely also increase competition in alternate sources of borrowings driving up the overall cost of funds.”